In June 2006, I warned about Pacific Ethanol (PEIX) in response to a story suggesting that the company presented a great investment opportunity:
Ethanol Investing: Counterpoint
Some excerpts of what I wrote:
I will make the case that many claims regarding ethanol are overblown, and some are simply fiction. I will also take a look at Pacific Ethanol to show why I think the underlying fundamentals make it a very risky investment.
Local grain supplies, preferably within 50 miles of the plant, are important for keeping costs down. It will probably be cheaper for a producer to produce ethanol in the Corn Belt, and then ship the ethanol to California than it would be to ship the corn there and produce it locally. There is a reason that California is not a hotbed of ethanol activity, despite the fact that Californians consume ethanol. It’s too far from the corn, so it is more cost effective to ship in finished ethanol.
This is not high tech, but this is how companies like PEIX are being valued. It is simply too easy to get into this business, and success is highly dependent on continued government mandates. Maybe someday cellulosic ethanol – the much touted next generation of ethanol technology – will warrant these kinds of valuations. I have great hope for cellulosic ethanol, and believe it can eventually make a contribution. But for now, I don’t think the underlying fundamentals warrant the valuations placed on grain ethanol producers – especially those far from corn supplies.
On the date that article was published, PEIX closed at $22.54. I wrote an update three months later after the price had fallen 38%. Yesterday, PEIX released earnings, and their stock fell to $6.89 – down 69% from the first article I wrote warning that PEIX was overpriced. Some excerpts from a story on their earnings:
NEW YORK (Associated Press) – Pacific Ethanol Inc. swung to a loss in the third quarter due to inventory write-downs as the price of ethanol fell dramatically, the company said Friday.
The ethanol producer posted a loss of $5.9 million, or 15 cents per share, versus profit of $2.7 million, or 7 cents per share, a year earlier.
Ethanol prices have fallen as supplies expanded faster than demand. At the same time, prices for ethanol’s main feedstock, corn, rose dramatically, further hurting profit margins.
Pacific Ethanol shares dropped to a new low of $7.13, down 69 cents of 8.8 percent, in morning trading.
Of course people continue to think that these are buying opportunities, and they keep losing money. Like this guy, who responded to an article I wrote about Bill Gates’ PEIX investment. For him, it was a buying opportunity. Of course share prices have fallen another 20% since then.
robert–
this article is good example of what i meant by my last comment in KHOSLA[article today]. this type info keeps me out of such stocks[ethanol is hot stock] as ethanol and others. it keeps me focused on froviders of process/service/tools neeed by macro sectors[hot sectors due to worldwide growth, e.g.]–examples–DE, CBI,MDR, OIH,PX,APD.
as said,quite helpful
fran
I don’t know what crap you are taking about. It is not PEIX buys some corn, produce ethanol and throw the rest. If you are not out of your mind, the co-product is WGD which is used to feed cattle. Now shipping ethanol which needs great infrastructure and WGD to west coast will cost you more than shipping corn. CA will start picking corn if prices remain high and if they feel they will be benefited.
Second, show me a pure ethanol plant which is in midwest and having advantage of being near corn. I heard small farmers who are making ethanol are not able to take it any more and stop producing it.
Dude it is ethanol price which is killing industry not the near to corn. For sure it is proven ethanol can’t be made out of corn and the cost of corn keep raising irrespective of ethanol price. Next time don’t give crap like and tell people I told this then.
Dude it is ethanol price which is killing industry not the near to corn.
Ethanol price is certainly a major factor, but PEIX has the additional disadvantage of having to ship in their corn. A lot of the fermentation products are waste (CO2, for instance) and that is waste that got transported to the West Coast with fossil fuels. Not nearly as cost effective as just shipping the finished ethanol.
Now shipping ethanol which needs great infrastructure and WGD to west coast
Why on earth would anyone ship WGD to the West Coast? That would of course be an even worse business model, but that is your strawman. I certainly haven’t suggested anything as ludicrous as that option.
Next time don’t give crap like and tell people I told this then.
I have pointed out as well on numerous occasions that the overbuilding was going to 1). Put upward pressure on corn prices; 2). Cause ethanol prices to fall, which will 3). Crush margins. That is exactly what has happened. It is just that PEIX has the additional disadvantage of being far from corn. And if you don’t think that’s a disadvantage, well, you are entitled to your opinion. But I quoted the RFA in the original piece, and they had written “An important factor to consider when building an ethanol plant is proximity to corn. Local grain supplies, preferably within 50 miles of the plant, are important for keeping costs down.” Maybe they didn’t really know what they are talking about. After all, they only represent the entire ethanol industry.